Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Its Order Cancellation Fee, 69673-69677 [2012-28135]
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Federal Register / Vol. 77, No. 224 / Tuesday, November 20, 2012 / Notices
process if primary drop copy ports ever
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Finally, the Exchange notes that it
operates in a highly competitive market
in which market participants can
readily favor competing venues. In such
an environment, the Exchange must
continually review, and consider
adjusting, its fees and credits to remain
competitive with other exchanges. For
the reasons described above, the
Exchange believes that the proposed
rule change reflects this competitive
environment.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective
upon filing pursuant to Section
19(b)(3)(A) 20 of the Act and
subparagraph (f)(2) of Rule 19b–4 21
thereunder, because it establishes a due,
fee, or other charge imposed by the
NYSE Arca.
At any time within 60 days of the
filing of such proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
wreier-aviles on DSK5TPTVN1PROD with
Number SR–NYSEArca–2012–122 on
the subject line.
SECURITIES AND EXCHANGE
COMMISSION
Paper Comments
[Release No. 34–68219; File No. SR–CHX–
2012–15]
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NYSEArca–2012–122. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549–1090, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing will also be available for
inspection and copying at the NYSE’s
principal office and on its Internet Web
site at www.nyse.com. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
NYSEArca–2012–122 and should be
submitted on or before December 11,
2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.22
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–28137 Filed 11–19–12; 8:45 am]
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
BILLING CODE 8011–01–P
Self-Regulatory Organizations;
Chicago Stock Exchange, Inc.; Notice
of Filing and Immediate Effectiveness
of Proposed Rule Change To Amend
Its Order Cancellation Fee
November 13, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on November
2, 2012, the Chicago Stock Exchange,
Inc. (‘‘CHX’’ or ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I, II and III below, which Items
have been prepared by the Exchange.
CHX has filed the proposal pursuant to
Section 19(b)(3)(A) of the Act 3 and Rule
19b–4(f)(2) thereunder,4 which renders
the proposal effective upon filing with
the Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The CHX proposes to amend its
Schedule of Fees and Assessments (the
‘‘Fee Schedule’’), effective November 2,
2012, relating to its order cancellation
fee for Participants entering and
subsequently cancelling order under
certain circumstances. The text of this
proposed rule change is available on the
Exchange’s Web site at https://
www.chx.com/rules/proposed_rules.htm
and in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
CHX included statements concerning
the purpose of and basis for the
proposed rule changes and discussed
any comments it received regarding the
proposal. The text of these statements
may be examined at the places specified
in Item IV below. The CHX has prepared
summaries, set forth in sections A, B
and C below, of the most significant
aspects of such statements.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(2).
2 17
20 15
21 17
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(2).
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22 17
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Federal Register / Vol. 77, No. 224 / Tuesday, November 20, 2012 / Notices
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
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History of the CHX Order Cancellation
Fee
Beginning in January 2010, the
Exchange published Fee Schedule
imposed a charge for order cancellations
in issues priced $1.00 per share or
more 5 submitted by Participants whose
orders rarely were at or near the
National Best Bid or Offer (‘‘NBBO’’),
herein referred to as the ‘‘original
cancellation fee.’’ 6 The application of
the original order cancellation fee
depended, inter alia, on a calculation
involving the number of Wide orders
(defined as display-eligible orders in the
Matching System which are two (2) or
more cents away from the NBBO),
Quotable orders (all other displayeligible orders), the number of trades
executed and number of cancellations
submitted by a Participant in a month.7
The purpose of the original order
cancellation fee was to incent
Participants to submit orders that were
close to the NBBO and to compensate
the Exchange for the systems and
operational costs and burdens
associated with handling and recording
orders that were rarely executed.
However, soon after the imposition of
the original order cancellation fee, the
Exchange had observed that the number
of unexecuted and displayed orders had
actually increased for certain
Participants. It was apparent to the
Exchange that in order to avoid
application of the cancellation fee,
certain Participants were submitting
Quotable orders to the CHX’s Matching
System, but for an extremely short
duration, rendering such activity
negligible. In addition to avoiding order
cancellation fees, this quotation activity
actually exacerbated the operational
costs which the Exchange sought to
avoid by creating the order cancellation
5 The Exchange excluded securities priced under
$1 per share from being subject to order
cancellation fees, as it did not appear that the
activity in those issues gave rise to the same
concerns as securities priced at or greater than $1
per share. The Exchange continues to find this to
be the case and proposes to maintain the exclusion
of securities priced under $1 per share from order
cancellation fees.
6 See Exchange Act Release No. 61392 (Jan. 21,
2010), 75 F.R. 4436 (Jan. 27, 2010) (SR–CHX–2010–
02).
7 Other requirements included that the trading
activity must have occurred in the Regular Trading
Session and concerned securities priced $1 per
share or more. Also, cancellations arising from
‘‘Immediate or Cancel’’ or ‘‘Fill or Kill’’ order types
were excluded from the calculation, as well as
execution of cross orders.
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fee in the first place. The Exchange had
observed that those firms entering the
limited durational orders described
above conducted much of their business
on our trading facilities in Exchange
Traded Funds (‘‘ETFs’’), Exchange
Traded Notes (‘‘ETNs’’) or Exchange
Traded Vehicles (‘‘ETVs’’), collectively
referred to as Exchange Traded Products
(‘‘ETPs’’).8 As such, in August 2010, the
Exchange amended its order
cancellation fee to exclude all orders,
transactions and cancellation activity in
ETPs from the cancellation fee
calculation, herein referred to as the
‘‘modified order cancellation fee.’’
Nevertheless, after the modified order
cancellation fee went into effect, the
Exchange observed that certain
Participants had found a number of
methods for avoiding the application of
the modified order cancellation fee. For
example, certain Participants submitted
Quotable orders to the CHX’s Matching
System in non-ETPs, but for an
extremely short duration. In other cases,
Participants submitted a large number of
Quotable orders in very thinly traded
securities prior to the end of the month.
These and other similar methods were
used by Participants to reduce the order
cancellation ratio and therefore, their
cancellation fee liability, without a
corresponding increase in order
executions. As such, in September 2011,
the Exchange revamped its order
cancellation fee methodology, herein
referred to as the ‘‘current order
cancellation fee.’’ 9
The current order cancellation fee
utilizes a formula, calculated on a daily
basis, which divides the Participant’s
total cancelled volume in a given issue
(‘‘cvissue’’) by the Participant’s total
executed volume in that issue
(‘‘exvissue’’). In those instances where a
Participant’s daily activity in a given
issue exceeds a cancellation ratio of 30,
the Exchange imposes an order
cancellation fee of $.30 on each
cancellation in that issue for that day
and bills such fees on a monthly basis.
By only crediting Participants with
Quotable orders of the same issue as
Wide orders, the Exchange sought to
eliminate the practice of quoting in
thinly-traded stocks to reduce
cancellation fee liability. Furthermore,
by imposing the cancellation fee on a
daily basis, the Exchange sought to
eliminate end-of-the-month fee
avoidance trading activity.
8 See Securities Exchange Act Release No. 61392
(January 21, 2010), 75 F.R. 4436 (Jan. 27, 2010) (SR–
CHX–2010–02).
9 See Securities Exchange Act Release No. 65268
(September 6, 2011), 76 FR 56246 (September 12,
2011) (SR–CHX–2011–25).
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After the current order cancellation
fee went into effect, there has been a
noticeable reduction in the
aforementioned ‘‘gaming’’ of the order
cancellation fee formula. However, the
Exchange submits that this fee
mechanism can be further perfected to
promote display liquidity (i.e., the
submission of more competitive
Quotable orders). As such, further
changes to the current order
cancellation fee formula are necessary.
Proposed Order Cancellation Fee
The Exchange now proposes to
readopt the original order cancellation
fee, with amendments to provide for the
daily calculation of the order
cancellation fee per security and to
incorporate new order cancellation
formula parameters with values set
security-type specific (i.e., for each
derivative and non-derivative tape A, B
and C security types). The Exchange
submits that these changes will better
incentivize Participants to submit orders
near the NBBO and will allow the
Exchange to better combat against
‘‘gaming’’ of the order cancellation fee
formula and to compensate the
Exchange for the processing and
electronic storage costs associated with
orders which ‘‘quote around’’ the NBBO
and rarely execute.
In determining whether the proposed
order cancellation fee would be
imposed, the Exchange proposes to
utilize a formula that subtracts from the
total daily number of Wide or ‘‘W’’
orders in a given security, the product
of Near or ‘‘N’’ orders 10 in the same
security submitted by the Participant in
the Regular Trading Session in a given
day and its corresponding N order
multiplier or ‘‘Nmult.’’ The difference
between these two values is then
divided by ‘‘E,’’ which is defined as the
greater of (a) one (1) or (b) the sum of
all Wide and Near orders in a given
security that are submitted and executed
(in whole or in part) in the Regular
Trading Session (excluding cross
transactions) on a given day.11 If the
remaining value is equal to or greater
than the corresponding ‘‘Cancellation
Ratio’’ for that security, a corresponding
10 ‘‘Near’’ is the same as ‘‘Quotable,’’ as used in
the original and modified order cancellation fee.
The Exchange submits that the term ‘‘Near’’ better
describes the order as its defining characteristic is
that it is near to or better than the NBBO.
11 Orders that are less than a round-lot size (less
than 100 shares in most securities) and
cancellations from ‘‘Immediate or Cancel’’ or ‘‘Fill
or Kill’’ orders will not be counted towards the
number of cancellations resulting in a fee charged
to a Participant. In the event that a Participant has
no executed provide orders in a month, we assume
that E has a value of one (1) in order to avoid a
mathematical error in applying the cancellation fee
formula.
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order cancellation fee would apply to
the Participant for that day’s activity in
that security. If, however, the value is
less than the corresponding
Cancellation Ratio, the Participant
would not be assessed any fee on its
cancellation instructions. Although the
Cancellation Ratio and order
cancellation fee may vary depending on
the type of security, the Exchange
proposes to set the Cancellation Ratio at
150 and the order cancellation fee rate
at $0.01 per cancelled order, across the
board.12 Moreover, the order
cancellation fee will be calculated daily,
per security and applied per Account
Symbol 13 maintained by each clearing
Participant.
In contrast to the original W order, an
order may now be considered Wide if
any one of the following three
conditions are met.14 First, a W order is
an order priced inferior to the National
Best Bid (‘‘NBB’’) for a buy order and
National Best Offer (‘‘NBO’’) for a sell
order at the time the order is received
by the Matching System and where the
difference between the order price and
the NBB or NBO is equal to or greater
than its corresponding ‘‘Threshold
Away Amount.’’ Second, a W order is
an order in a security that is voluntarily
cancelled by the Participant prior to the
expiration of its corresponding
‘‘Minimum Duration,’’ after acceptance
by the Matching System, without any
partial executions. Finally, a W order is
one that is marked ‘‘Do Not Display,’’
pursuant to CHX Article 20, Rule
4(b)(9).15 By classifying such orders as
W orders, the Exchange endeavors to
incentivize Participants to post
displayed bids and offers and thereby
promote displayed liquidity on the
Exchange. In turn, the Exchange
anticipates that increased displayed
12 Changes to any of the proposed parameter
values, including Order Cancellation Fee,
Cancellation Ratio, Threshold Away Amount,
Minimum Duration and Nmult, will be made through
proposed fee filings pursuant to Rule 19b–4.
13 Individual Account Symbols are assigned, by
the Exchange, to each trading account maintained
by a clearing Participant. Each clearing Participant
which executes orders on the Exchange has at least
one Account Symbol, while some clearing
Participants have multiple account symbols.
Multiple accounts can be used by clearing
Participants, for example, to segregate the order
activity of different clients. Calculating and
applying the cancellation fee by the Account
Symbols maintained by the clearing Participant
provides a more precise way of identifying the
conduct and correspondent firms implicated by the
proposed fee provisions.
14 As a general matter, all W orders are securities
priced at $1.00 share or more when submitted by
the Participant in the Regular Trading Session.
15 Article 20, Rule 4(b)(9) defines a ‘‘Do Not
Display’’ order as an order for at least 1,000 shares
when entered that is not to be displayed in whole
or in part.
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liquidity would result in a greater
number of order executions and,
ultimately, increased revenue for the
Exchange.
Moreover, the proposed W order
introduces two new parameters. First,
the ‘‘Threshold Away Amount’’ is a
security-type specific value that
establishes a bright-line value for
determining when an order price is
either away or near the NBBO. Although
the value of this parameter may
eventually vary by security-type, the
Exchange proposes to set the Threshold
Away Amount at $0.03 for all six
security types.16 Second, the ‘‘Minimum
Duration’’ parameter is also a securitytype specific value that establishes a
bright-line time limit for determining
whether an order is considered Wide or
may be considered Near. The purpose of
this parameter is to promote order
execution by curtailing the submission
of orders that are not present and
displayable for a reasonable period of
time and, consequently, to reduce the
incidence of disruptive ‘‘flickering
quotes.’’ The Exchange submits that the
longer an order is displayed the better
chance it has of being executed.
Although this value may also vary by
security type, the Exchange proposes to
set the Minimum Duration at 10
milliseconds for all six security types.17
In contrast to the original ‘‘Quotable’’
or ‘‘Q’’ order, the proposed N order is
defined as (1) an order in a security
priced at $1.00 per share or more
submitted by the Participant in the
Regular Trading Session, (2) where the
difference between the order price and
the NBB or NBO is less than its
corresponding Threshold Away Amount
and (3) where the order is not
voluntarily cancelled by the Participant
prior to either its corresponding
Minimum Duration or prior to a partial
execution of the order, whichever is
earlier.
Moreover, the proposed N order will
be modified by a ‘‘Near order
multiplier’’ or ‘‘Nmult,’’ which is a
security-type specific value, which
multiplies the value of N. The practical
effect of the Nmult is that it enhances the
mitigating effect of N orders on the
order cancellation ratio. Therefore, the
purpose of the Nmult is to give the
Exchange the ability to enhance or
reduce the impact of N on the order
cancellation ratio, so as to ensure, inter
alia, equitable application of the order
cancellation fee. This also provides a
strong incentive for Participants to
provide more Near orders and fewer
Wide orders by giving each Near order
16 Supra
PO 00000
two times the weight of a Wide order in
calculating the calculation ratio.
Although this number may eventually
vary by security type, like the
Cancellation Ratio, order cancellation
fee rate, Threshold Away Amount and
Minimum Duration, the Exchange
proposes to set the ‘‘Nmult’’at two (2) for
all six security types.18 Generally
speaking, all of these new parameters
will allow the Exchange to better adapt
to future issues with the application of
the proposed order cancellation formula
by merely adjusting these values.
The following examples illustrate
how an order may be classified as either
Wide or Near. For all Examples, assume
submission of a buy order for 1,000
shares of a Tape A non-derivative
security:
For Example A, assume that the price
of the order is $0.04 inferior to the NBB
and it is voluntarily cancelled by the
Participant twelve (12) milliseconds
after submission to the Matching
System. Since the difference between
the order price and NBB (‘‘price
difference’’) is greater than the
Threshold Away Amount for a Tape A
non-derivative security ($0.03), this is a
Wide order, notwithstanding all other
factors.
For Example B, assume that the price
of the order is $0.04 inferior to the NBB
and it is fully executed after twelve (12)
milliseconds. Since the price difference
is greater than the corresponding
Threshold Away Amount, this is a Wide
order, notwithstanding all other factors.
For Example C, assume that the price
of the order is $0.04 inferior to the NBB,
there is a partial execution of 500 shares
after five (5) milliseconds and the
remainder of the order is voluntarily
cancelled after twelve (12) milliseconds.
Since the price difference is greater than
the corresponding Threshold Away
Amount, it is a Wide order,
notwithstanding all other factors.
For Example D, assume that the price
of the order is $0.01 inferior to the NBB,
there is a partial execution of 500 shares
after five (5) milliseconds, the
remainder is voluntarily cancelled after
twelve (12) milliseconds and the order
is marked ‘‘Do Not Display.’’ Since the
order is marked ‘‘Do Not Display,’’ it is
a Wide order, notwithstanding all other
factors.
For Example E, assume that the order
price is equal to the NBB and the order
is fully executed after twelve (12)
milliseconds. Since the price difference
is less than the corresponding
Threshold Away Amount and the order
was fully executed, this is a Near order.
note 12.
17 Id.
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For Example F, assume that the order
price is equal to the NBB, there is a
partial execution of 500 shares after five
(5) milliseconds and the balance of the
order is voluntarily cancelled after eight
(8) milliseconds. Since the price
difference is less than the corresponding
Threshold Away Amount and the order
was cancelled only after a partial
execution of 500 shares, this is a Near
order, notwithstanding the order having
been voluntarily cancelled prior to the
expiration of the corresponding
Minimum Duration.
For Example G, assume that the order
price is $0.01 inferior to the NBB and it
is voluntarily cancelled after 20
milliseconds without any executions.
Since the price difference is less than
the corresponding Threshold Away
Amount and the order was only
cancelled after the expiration of the
corresponding Minimum Duration, it is
a Near order.
Moreover, the operation of the
proposed order cancellation fee formula
can be illustrated by the use of some
more examples. For Example 1, assume
that on a given day, a Participant firm
submits to the Matching System 200,000
buy orders for a Tape A non-derivative
security. Of this amount, 180,000 orders
are priced $0.04 inferior to the NBB and
are voluntarily cancelled after twelve
(12) milliseconds, thus making these
orders Wide. The remaining 20,000
orders are priced $0.02 inferior to the
NBB and are voluntarily cancelled after
twelve (12) milliseconds, thus making
these orders Near. Out of 200,000
submitted orders, 1,000 orders are
executed in whole or in part.19 Pursuant
to the proposed formula, the difference
between W (180,000) and the product of
N and the corresponding Nmult of two
(40,000) is 140,000. Dividing that figure
by the number of orders which were
executed (E or 1,000) results in a
cancellation ratio of 140. Since the
corresponding Cancellation Ratio of a
Tape A non-derivative security is 150,
no cancellation fee would be assessed
on this day, to this Participant, with
respect to this specific security.
Example 1 also illustrates the power
of the Nmult. Under Example 1, the Nmult
doubled the N value to the point that
the ratio was brought below the
cancellation ratio threshold. That is,
without the N-multiplier, the
cancellation ratio would have been 160
and the Participant would have been
assessed the cancellation fee. The utility
of the Nmult and other parameters lies in
19 Since orders may be partially executed, the
Participants may receive more trade executions
than orders. The Exchange believes that the formula
should be based upon the number of orders
executed and not the number of trades reported.
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its ability to give the Exchange
flexibility to make adjustments when
necessary, through proposed fee filings
pursuant to Rule 19b–4, so as to avoid
unintended or inequitable application of
the cancellation fee, without having to
completely revamp the formula, as well
as to promote the submission of Near
orders.
For Example 2, we assume the same
facts as above, with the exception that
the Participant firm submits a total of
400,000 buy orders for a Tape A nonderivative security on a given day and
that 380,000 of those orders are Wide
orders. Also assume that 200,000 such
W and N orders are cancelled. Pursuant
to the proposed formula, the difference
between W (380,000) and the product of
N and the corresponding N multiplier of
two (40,000) is 340,000. Dividing that
figure by the number of orders which
were executed (E or 1,000) gives us an
order cancellation ratio of 340. Since the
corresponding order cancellation ratio
of a Tape A non-derivative security is
150, a cancellation fee of $2,000, which
is the product of 200,000 cancellations
and $0.01 per order cancelled, would be
assessed on this day, to this Participant,
with respect to this specific security.
The purpose of this order cancellation
fee is to incent Participants to submit
orders which, when quoted, are at or
close to the NBBO or, at the very least,
compensate the Exchange for the
processing and electronic storage costs
associated with orders which rarely
execute. Under the proposed formula,
the likelihood that the cancellation fee
would be imposed increases with the
number of Wide orders submitted by the
Participant. The formula is designed to
isolate a pattern of behavior in which a
Participant submits orders well outside
the NBBO and frequently cancels and
reenters such orders to continuously
stay outside the NBBO.20 Participants
that submit a small number of Wide
orders or submit a relatively large
number of Near orders are unlikely to be
impacted by the proposed fee.
Moreover, the Minimum Duration
parameter will prevent Participants
from gaming the formula by submitting
orders which result in undesirable
‘‘flickering quotes’’ and the Nmult will
allow the Exchange to multiply the
20 Although the Exchange is not privy to the
trading strategies of the firms submitting large
numbers of orders well outside the NBBO, it
appears that they are hoping to benefit from
Intermarket Sweep Order (‘‘ISO’’) satisfaction
orders sent to the Exchange pursuant to the
requirements of Regulation NMS when a trade
through occurs on another trading center and the
Wide orders are at the CHX BBO. Since the sending
of ISO satisfaction orders is not required for nonRegular Trading Session activity, we are excluding
such activity from the proposed fee.
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mitigating effect of Near orders on the
order cancellation ratio when necessary.
In addition, the likelihood that the
cancellation fee will be assessed
diminishes as the number of orders
actually executed (E) increases. As such,
the proposed order cancellation fee will
have the dual effect of promoting order
execution and compensating the
Exchange for the processing and
electronic storage costs associated with
orders which ‘‘quote around’’ the NBBO
and rarely execute.
The Exchange believes that the
proposed order cancellation fee benefits
the national market system by
promoting the display of Near orders,
which will result in increased displayed
liquidity and reduced order
cancellations. This will, in turn, relieve
the Exchange’s systems capacity and
will result in decreased order and
market data storage costs. Since Wide
orders are infrequently executed, such
orders are more expensive, on a relative
basis, for the Exchange to receive and
process.
The Exchange proposes to implement
the cancellation charge effective
November 2, 2012. The formula by
which the cancellation fee is derived
shall be calculated and made available
to Participants daily, but billed after the
end of the month.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6(b) of the Act 21 in general, and
furthers the objectives of Section 6(b)(4)
of the Act 22 in particular, in that it
provides for the equitable allocation of
reasonable dues, fees and other charges
among members and other persons
using any facility or system which the
Exchange operates or controls. The
Exchange believes that amendments to
the order cancellation fee described
herein should help to recoup some of
the costs of administering and
processing large numbers of cancelled
orders while fairly allocating costs
among Participants according to system
use. In addition, these changes to the
Fee Schedule would equitably allocate
reasonable fees among Participants in a
non-discriminatory manner by properly
imposing fees on those Participants
which excessively enter and
subsequently cancel orders while not
imposing fees on Participants that do
not engage in this resource draining
behavior. Furthermore, the proposed
order cancellation fee of $0.01/order
cancellation is reasonable in light of the
fact that it is less than the current order
21 15
22 15
E:\FR\FM\20NON1.SGM
U.S.C. 78f.
U.S.C. 78f(b)(4).
20NON1
Federal Register / Vol. 77, No. 224 / Tuesday, November 20, 2012 / Notices
cancellation fee of $0.30/order
cancellation.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The proposed rule change is to take
effect pursuant to Section 19(b)(3)(A)(ii)
of the Act 23 and subparagraph (f)(2) of
Rule 19b-4 thereunder 24 because it
establishes or changes a due, fee or
other charge applicable to the
Exchange’s members and non-members,
which renders the proposed rule change
effective upon filing.
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–CHX–2012–15 on the
subject line.
wreier-aviles on DSK5TPTVN1PROD with
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–CHX–2012–15. This file
23 15
24 17
U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(2).
VerDate Mar<15>2010
15:12 Nov 19, 2012
number should be included on the
subject line if email is used.
To help the Commission process and
review your comments more efficiently,
please use only one method. The
Commission will post all comments on
the Commission’s Internet Web site
(https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room on official business
days between the hours of 10:00 a.m.
and 3:00 p.m. Copies of such filing also
will be available for inspection and
copying at the principal offices of CHX.
All comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–CHX–2012–15, and should
be submitted on or before December 11,
2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.25
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–28135 Filed 11–19–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68233; File No. SR–
NYSEArca–2012–103]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Granting Approval of
Proposed Rule Changes Amending
NYSE Arca, Inc. Rules 3.2 and 3.3 and
NYSE Arca Equities, Inc. Rules 3.2 and
3.3 To Expand the Eligibility
Requirements for Service on Certain
Boards of Directors and Committees
November 14, 2012.
I. Introduction
On September 18, 2012, NYSE Arca,
Inc. (‘‘NYSE Arca’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), pursuant to Section
25 17
Jkt 229001
PO 00000
CFR 200.30–3(a)(12).
Frm 00088
Fmt 4703
Sfmt 4703
69677
19(b)(1) 1 of the Securities Exchange Act
of 1934 (‘‘Act’’),2 and Rule 19b–4
thereunder,3 proposed rule changes to
amend NYSE Arca Rules 3.2 and 3.3
and NYSE Arca Equities, Inc. (‘‘NYSE
Arca Equities’’) Rules 3.2 and 3.3 to
expand the eligibility requirements for
service on the Board of Directors of
NYSE Arca (‘‘NYSE Arca Board’’) and
certain committees of NYSE Arca and
NYSE Arca Equities. The proposed rule
changes were published for comment in
the Federal Register on October 1,
2012.4 The Commission received no
comment letters on the proposal.
II. Background
Amendments to NYSE Arca Rules 3.2
and 3.3
NYSE Arca Rule 3.2(a) sets forth the
general provisions for Options
Committees. Specifically, NYSE Arca
Rule 3.2(a)(8) states that any OTP
Holder 5 of the Exchange in good
standing, Allied Person 6 of an OTP
Firm,7 or person from the public is
eligible for appointment or election to
various Options Committees. NYSE
Arca Rule 3.2(b) sets forth the eligibility
requirements for three specific Options
Committees: The Ethics and Business
Conduct Committee (the ‘‘EBCC
Committee’’), the Nominating
Committee, and the OTP Advisory
Committee.8 NYSE Arca Rule 3.3(a) sets
forth the eligibility requirements for the
Board Appeals Committee and Appeals
1 15
U.S.C. 78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
4 See Securities Exchange Act Release No. 67923
(September 25, 2012), 77 FR 59995 (SR–NYSEArca–
2012–103) (the ‘‘Notice’’).
5 An ‘‘OTP Holder’’ is a natural person, in good
standing, who has been issued an Options Trading
Permit (‘‘OTP’’), or has been named as a nominee.
See NYSE Arca Rule 1.1(q).
6 An ‘‘Allied Person’’ (for purposes of NYSE Arca
Rules) is an individual who is (1) an employee of
an OTP Firm who controls such firm, (2) an
employee of an OTP Firm corporation who is a
director or a principal executive officer of such
corporation, (3) an employee of an OTP Firm
limited liability company who is a manager or a
principal executive officer of such limited liability
company, or (4) a general partner in an OTP Firm
partnership. Each of these persons must be
approved by the Exchange as an Allied Person. See
NYSE Arca Rule 1.1(b).
7 ‘‘OTP Firm’’ means a sole proprietorship,
partnership, corporation, limited liability company,
or other organization in good standing who holds
an OTP or upon whom an individual OTP Holder
has conferred trading privileges on the Exchange’s
trading facilities. See NYSE Arca Rule 1.1(r).
8 The EBCC currently consists primarily of OTP
Holders and Allied Persons of an OTP Firm. See
NYSE Arca Rule 3.2(b)(1)(A). The Nominating
Committee currently consists of six OTP Holders.
See NYSE Arca Rule 3.2(b)(2)(A). The OTP
Advisory Committee currently consists of OTP
Holders. See NYSE Arca Rule 3.2(b)(3)(A).
2 15
E:\FR\FM\20NON1.SGM
20NON1
Agencies
[Federal Register Volume 77, Number 224 (Tuesday, November 20, 2012)]
[Notices]
[Pages 69673-69677]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-28135]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68219; File No. SR-CHX-2012-15]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend Its Order Cancellation Fee
November 13, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 2, 2012, the Chicago Stock Exchange, Inc. (``CHX'' or
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II
and III below, which Items have been prepared by the Exchange. CHX has
filed the proposal pursuant to Section 19(b)(3)(A) of the Act \3\ and
Rule 19b-4(f)(2) thereunder,\4\ which renders the proposal effective
upon filing with the Commission. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The CHX proposes to amend its Schedule of Fees and Assessments (the
``Fee Schedule''), effective November 2, 2012, relating to its order
cancellation fee for Participants entering and subsequently cancelling
order under certain circumstances. The text of this proposed rule
change is available on the Exchange's Web site at https://www.chx.com/rules/proposed_rules.htm and in the Commission's Public Reference
Room, 100 F Street NE., Washington, DC 20549.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the CHX included statements
concerning the purpose of and basis for the proposed rule changes and
discussed any comments it received regarding the proposal. The text of
these statements may be examined at the places specified in Item IV
below. The CHX has prepared summaries, set forth in sections A, B and C
below, of the most significant aspects of such statements.
[[Page 69674]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
History of the CHX Order Cancellation Fee
Beginning in January 2010, the Exchange published Fee Schedule
imposed a charge for order cancellations in issues priced $1.00 per
share or more \5\ submitted by Participants whose orders rarely were at
or near the National Best Bid or Offer (``NBBO''), herein referred to
as the ``original cancellation fee.'' \6\ The application of the
original order cancellation fee depended, inter alia, on a calculation
involving the number of Wide orders (defined as display-eligible orders
in the Matching System which are two (2) or more cents away from the
NBBO), Quotable orders (all other display-eligible orders), the number
of trades executed and number of cancellations submitted by a
Participant in a month.\7\ The purpose of the original order
cancellation fee was to incent Participants to submit orders that were
close to the NBBO and to compensate the Exchange for the systems and
operational costs and burdens associated with handling and recording
orders that were rarely executed.
---------------------------------------------------------------------------
\5\ The Exchange excluded securities priced under $1 per share
from being subject to order cancellation fees, as it did not appear
that the activity in those issues gave rise to the same concerns as
securities priced at or greater than $1 per share. The Exchange
continues to find this to be the case and proposes to maintain the
exclusion of securities priced under $1 per share from order
cancellation fees.
\6\ See Exchange Act Release No. 61392 (Jan. 21, 2010), 75 F.R.
4436 (Jan. 27, 2010) (SR-CHX-2010-02).
\7\ Other requirements included that the trading activity must
have occurred in the Regular Trading Session and concerned
securities priced $1 per share or more. Also, cancellations arising
from ``Immediate or Cancel'' or ``Fill or Kill'' order types were
excluded from the calculation, as well as execution of cross orders.
---------------------------------------------------------------------------
However, soon after the imposition of the original order
cancellation fee, the Exchange had observed that the number of
unexecuted and displayed orders had actually increased for certain
Participants. It was apparent to the Exchange that in order to avoid
application of the cancellation fee, certain Participants were
submitting Quotable orders to the CHX's Matching System, but for an
extremely short duration, rendering such activity negligible. In
addition to avoiding order cancellation fees, this quotation activity
actually exacerbated the operational costs which the Exchange sought to
avoid by creating the order cancellation fee in the first place. The
Exchange had observed that those firms entering the limited durational
orders described above conducted much of their business on our trading
facilities in Exchange Traded Funds (``ETFs''), Exchange Traded Notes
(``ETNs'') or Exchange Traded Vehicles (``ETVs''), collectively
referred to as Exchange Traded Products (``ETPs'').\8\ As such, in
August 2010, the Exchange amended its order cancellation fee to exclude
all orders, transactions and cancellation activity in ETPs from the
cancellation fee calculation, herein referred to as the ``modified
order cancellation fee.''
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release No. 61392 (January 21,
2010), 75 F.R. 4436 (Jan. 27, 2010) (SR-CHX-2010-02).
---------------------------------------------------------------------------
Nevertheless, after the modified order cancellation fee went into
effect, the Exchange observed that certain Participants had found a
number of methods for avoiding the application of the modified order
cancellation fee. For example, certain Participants submitted Quotable
orders to the CHX's Matching System in non-ETPs, but for an extremely
short duration. In other cases, Participants submitted a large number
of Quotable orders in very thinly traded securities prior to the end of
the month. These and other similar methods were used by Participants to
reduce the order cancellation ratio and therefore, their cancellation
fee liability, without a corresponding increase in order executions. As
such, in September 2011, the Exchange revamped its order cancellation
fee methodology, herein referred to as the ``current order cancellation
fee.'' \9\
---------------------------------------------------------------------------
\9\ See Securities Exchange Act Release No. 65268 (September 6,
2011), 76 FR 56246 (September 12, 2011) (SR-CHX-2011-25).
---------------------------------------------------------------------------
The current order cancellation fee utilizes a formula, calculated
on a daily basis, which divides the Participant's total cancelled
volume in a given issue (``cvissue'') by the Participant's total
executed volume in that issue (``exvissue''). In those instances where
a Participant's daily activity in a given issue exceeds a cancellation
ratio of 30, the Exchange imposes an order cancellation fee of $.30 on
each cancellation in that issue for that day and bills such fees on a
monthly basis. By only crediting Participants with Quotable orders of
the same issue as Wide orders, the Exchange sought to eliminate the
practice of quoting in thinly-traded stocks to reduce cancellation fee
liability. Furthermore, by imposing the cancellation fee on a daily
basis, the Exchange sought to eliminate end-of-the-month fee avoidance
trading activity.
After the current order cancellation fee went into effect, there
has been a noticeable reduction in the aforementioned ``gaming'' of the
order cancellation fee formula. However, the Exchange submits that this
fee mechanism can be further perfected to promote display liquidity
(i.e., the submission of more competitive Quotable orders). As such,
further changes to the current order cancellation fee formula are
necessary.
Proposed Order Cancellation Fee
The Exchange now proposes to readopt the original order
cancellation fee, with amendments to provide for the daily calculation
of the order cancellation fee per security and to incorporate new order
cancellation formula parameters with values set security-type specific
(i.e., for each derivative and non-derivative tape A, B and C security
types). The Exchange submits that these changes will better incentivize
Participants to submit orders near the NBBO and will allow the Exchange
to better combat against ``gaming'' of the order cancellation fee
formula and to compensate the Exchange for the processing and
electronic storage costs associated with orders which ``quote around''
the NBBO and rarely execute.
In determining whether the proposed order cancellation fee would be
imposed, the Exchange proposes to utilize a formula that subtracts from
the total daily number of Wide or ``W'' orders in a given security, the
product of Near or ``N'' orders \10\ in the same security submitted by
the Participant in the Regular Trading Session in a given day and its
corresponding N order multiplier or ``Nmult.'' The
difference between these two values is then divided by ``E,'' which is
defined as the greater of (a) one (1) or (b) the sum of all Wide and
Near orders in a given security that are submitted and executed (in
whole or in part) in the Regular Trading Session (excluding cross
transactions) on a given day.\11\ If the remaining value is equal to or
greater than the corresponding ``Cancellation Ratio'' for that
security, a corresponding
[[Page 69675]]
order cancellation fee would apply to the Participant for that day's
activity in that security. If, however, the value is less than the
corresponding Cancellation Ratio, the Participant would not be assessed
any fee on its cancellation instructions. Although the Cancellation
Ratio and order cancellation fee may vary depending on the type of
security, the Exchange proposes to set the Cancellation Ratio at 150
and the order cancellation fee rate at $0.01 per cancelled order,
across the board.\12\ Moreover, the order cancellation fee will be
calculated daily, per security and applied per Account Symbol \13\
maintained by each clearing Participant.
---------------------------------------------------------------------------
\10\ ``Near'' is the same as ``Quotable,'' as used in the
original and modified order cancellation fee. The Exchange submits
that the term ``Near'' better describes the order as its defining
characteristic is that it is near to or better than the NBBO.
\11\ Orders that are less than a round-lot size (less than 100
shares in most securities) and cancellations from ``Immediate or
Cancel'' or ``Fill or Kill'' orders will not be counted towards the
number of cancellations resulting in a fee charged to a Participant.
In the event that a Participant has no executed provide orders in a
month, we assume that E has a value of one (1) in order to avoid a
mathematical error in applying the cancellation fee formula.
\12\ Changes to any of the proposed parameter values, including
Order Cancellation Fee, Cancellation Ratio, Threshold Away Amount,
Minimum Duration and Nmult, will be made through proposed
fee filings pursuant to Rule 19b-4.
\13\ Individual Account Symbols are assigned, by the Exchange,
to each trading account maintained by a clearing Participant. Each
clearing Participant which executes orders on the Exchange has at
least one Account Symbol, while some clearing Participants have
multiple account symbols. Multiple accounts can be used by clearing
Participants, for example, to segregate the order activity of
different clients. Calculating and applying the cancellation fee by
the Account Symbols maintained by the clearing Participant provides
a more precise way of identifying the conduct and correspondent
firms implicated by the proposed fee provisions.
---------------------------------------------------------------------------
In contrast to the original W order, an order may now be considered
Wide if any one of the following three conditions are met.\14\ First, a
W order is an order priced inferior to the National Best Bid (``NBB'')
for a buy order and National Best Offer (``NBO'') for a sell order at
the time the order is received by the Matching System and where the
difference between the order price and the NBB or NBO is equal to or
greater than its corresponding ``Threshold Away Amount.'' Second, a W
order is an order in a security that is voluntarily cancelled by the
Participant prior to the expiration of its corresponding ``Minimum
Duration,'' after acceptance by the Matching System, without any
partial executions. Finally, a W order is one that is marked ``Do Not
Display,'' pursuant to CHX Article 20, Rule 4(b)(9).\15\ By classifying
such orders as W orders, the Exchange endeavors to incentivize
Participants to post displayed bids and offers and thereby promote
displayed liquidity on the Exchange. In turn, the Exchange anticipates
that increased displayed liquidity would result in a greater number of
order executions and, ultimately, increased revenue for the Exchange.
---------------------------------------------------------------------------
\14\ As a general matter, all W orders are securities priced at
$1.00 share or more when submitted by the Participant in the Regular
Trading Session.
\15\ Article 20, Rule 4(b)(9) defines a ``Do Not Display'' order
as an order for at least 1,000 shares when entered that is not to be
displayed in whole or in part.
---------------------------------------------------------------------------
Moreover, the proposed W order introduces two new parameters.
First, the ``Threshold Away Amount'' is a security-type specific value
that establishes a bright-line value for determining when an order
price is either away or near the NBBO. Although the value of this
parameter may eventually vary by security-type, the Exchange proposes
to set the Threshold Away Amount at $0.03 for all six security
types.\16\ Second, the ``Minimum Duration'' parameter is also a
security-type specific value that establishes a bright-line time limit
for determining whether an order is considered Wide or may be
considered Near. The purpose of this parameter is to promote order
execution by curtailing the submission of orders that are not present
and displayable for a reasonable period of time and, consequently, to
reduce the incidence of disruptive ``flickering quotes.'' The Exchange
submits that the longer an order is displayed the better chance it has
of being executed. Although this value may also vary by security type,
the Exchange proposes to set the Minimum Duration at 10 milliseconds
for all six security types.\17\
---------------------------------------------------------------------------
\16\ Supra note 12.
\17\ Id.
---------------------------------------------------------------------------
In contrast to the original ``Quotable'' or ``Q'' order, the
proposed N order is defined as (1) an order in a security priced at
$1.00 per share or more submitted by the Participant in the Regular
Trading Session, (2) where the difference between the order price and
the NBB or NBO is less than its corresponding Threshold Away Amount and
(3) where the order is not voluntarily cancelled by the Participant
prior to either its corresponding Minimum Duration or prior to a
partial execution of the order, whichever is earlier.
Moreover, the proposed N order will be modified by a ``Near order
multiplier'' or ``Nmult,'' which is a security-type specific
value, which multiplies the value of N. The practical effect of the
Nmult is that it enhances the mitigating effect of N orders
on the order cancellation ratio. Therefore, the purpose of the
Nmult is to give the Exchange the ability to enhance or
reduce the impact of N on the order cancellation ratio, so as to
ensure, inter alia, equitable application of the order cancellation
fee. This also provides a strong incentive for Participants to provide
more Near orders and fewer Wide orders by giving each Near order two
times the weight of a Wide order in calculating the calculation ratio.
Although this number may eventually vary by security type, like the
Cancellation Ratio, order cancellation fee rate, Threshold Away Amount
and Minimum Duration, the Exchange proposes to set the
``Nmult''at two (2) for all six security types.\18\
Generally speaking, all of these new parameters will allow the Exchange
to better adapt to future issues with the application of the proposed
order cancellation formula by merely adjusting these values.
---------------------------------------------------------------------------
\18\ Id.
---------------------------------------------------------------------------
The following examples illustrate how an order may be classified as
either Wide or Near. For all Examples, assume submission of a buy order
for 1,000 shares of a Tape A non-derivative security:
For Example A, assume that the price of the order is $0.04 inferior
to the NBB and it is voluntarily cancelled by the Participant twelve
(12) milliseconds after submission to the Matching System. Since the
difference between the order price and NBB (``price difference'') is
greater than the Threshold Away Amount for a Tape A non-derivative
security ($0.03), this is a Wide order, notwithstanding all other
factors.
For Example B, assume that the price of the order is $0.04 inferior
to the NBB and it is fully executed after twelve (12) milliseconds.
Since the price difference is greater than the corresponding Threshold
Away Amount, this is a Wide order, notwithstanding all other factors.
For Example C, assume that the price of the order is $0.04 inferior
to the NBB, there is a partial execution of 500 shares after five (5)
milliseconds and the remainder of the order is voluntarily cancelled
after twelve (12) milliseconds. Since the price difference is greater
than the corresponding Threshold Away Amount, it is a Wide order,
notwithstanding all other factors.
For Example D, assume that the price of the order is $0.01 inferior
to the NBB, there is a partial execution of 500 shares after five (5)
milliseconds, the remainder is voluntarily cancelled after twelve (12)
milliseconds and the order is marked ``Do Not Display.'' Since the
order is marked ``Do Not Display,'' it is a Wide order, notwithstanding
all other factors.
For Example E, assume that the order price is equal to the NBB and
the order is fully executed after twelve (12) milliseconds. Since the
price difference is less than the corresponding Threshold Away Amount
and the order was fully executed, this is a Near order.
[[Page 69676]]
For Example F, assume that the order price is equal to the NBB,
there is a partial execution of 500 shares after five (5) milliseconds
and the balance of the order is voluntarily cancelled after eight (8)
milliseconds. Since the price difference is less than the corresponding
Threshold Away Amount and the order was cancelled only after a partial
execution of 500 shares, this is a Near order, notwithstanding the
order having been voluntarily cancelled prior to the expiration of the
corresponding Minimum Duration.
For Example G, assume that the order price is $0.01 inferior to the
NBB and it is voluntarily cancelled after 20 milliseconds without any
executions. Since the price difference is less than the corresponding
Threshold Away Amount and the order was only cancelled after the
expiration of the corresponding Minimum Duration, it is a Near order.
Moreover, the operation of the proposed order cancellation fee
formula can be illustrated by the use of some more examples. For
Example 1, assume that on a given day, a Participant firm submits to
the Matching System 200,000 buy orders for a Tape A non-derivative
security. Of this amount, 180,000 orders are priced $0.04 inferior to
the NBB and are voluntarily cancelled after twelve (12) milliseconds,
thus making these orders Wide. The remaining 20,000 orders are priced
$0.02 inferior to the NBB and are voluntarily cancelled after twelve
(12) milliseconds, thus making these orders Near. Out of 200,000
submitted orders, 1,000 orders are executed in whole or in part.\19\
Pursuant to the proposed formula, the difference between W (180,000)
and the product of N and the corresponding Nmult of two
(40,000) is 140,000. Dividing that figure by the number of orders which
were executed (E or 1,000) results in a cancellation ratio of 140.
Since the corresponding Cancellation Ratio of a Tape A non-derivative
security is 150, no cancellation fee would be assessed on this day, to
this Participant, with respect to this specific security.
---------------------------------------------------------------------------
\19\ Since orders may be partially executed, the Participants
may receive more trade executions than orders. The Exchange believes
that the formula should be based upon the number of orders executed
and not the number of trades reported.
---------------------------------------------------------------------------
Example 1 also illustrates the power of the Nmult. Under
Example 1, the Nmult doubled the N value to the point that
the ratio was brought below the cancellation ratio threshold. That is,
without the N-multiplier, the cancellation ratio would have been 160
and the Participant would have been assessed the cancellation fee. The
utility of the Nmult and other parameters lies in its
ability to give the Exchange flexibility to make adjustments when
necessary, through proposed fee filings pursuant to Rule 19b-4, so as
to avoid unintended or inequitable application of the cancellation fee,
without having to completely revamp the formula, as well as to promote
the submission of Near orders.
For Example 2, we assume the same facts as above, with the
exception that the Participant firm submits a total of 400,000 buy
orders for a Tape A non-derivative security on a given day and that
380,000 of those orders are Wide orders. Also assume that 200,000 such
W and N orders are cancelled. Pursuant to the proposed formula, the
difference between W (380,000) and the product of N and the
corresponding N multiplier of two (40,000) is 340,000. Dividing that
figure by the number of orders which were executed (E or 1,000) gives
us an order cancellation ratio of 340. Since the corresponding order
cancellation ratio of a Tape A non-derivative security is 150, a
cancellation fee of $2,000, which is the product of 200,000
cancellations and $0.01 per order cancelled, would be assessed on this
day, to this Participant, with respect to this specific security.
The purpose of this order cancellation fee is to incent
Participants to submit orders which, when quoted, are at or close to
the NBBO or, at the very least, compensate the Exchange for the
processing and electronic storage costs associated with orders which
rarely execute. Under the proposed formula, the likelihood that the
cancellation fee would be imposed increases with the number of Wide
orders submitted by the Participant. The formula is designed to isolate
a pattern of behavior in which a Participant submits orders well
outside the NBBO and frequently cancels and reenters such orders to
continuously stay outside the NBBO.\20\ Participants that submit a
small number of Wide orders or submit a relatively large number of Near
orders are unlikely to be impacted by the proposed fee. Moreover, the
Minimum Duration parameter will prevent Participants from gaming the
formula by submitting orders which result in undesirable ``flickering
quotes'' and the Nmult will allow the Exchange to multiply
the mitigating effect of Near orders on the order cancellation ratio
when necessary. In addition, the likelihood that the cancellation fee
will be assessed diminishes as the number of orders actually executed
(E) increases. As such, the proposed order cancellation fee will have
the dual effect of promoting order execution and compensating the
Exchange for the processing and electronic storage costs associated
with orders which ``quote around'' the NBBO and rarely execute.
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\20\ Although the Exchange is not privy to the trading
strategies of the firms submitting large numbers of orders well
outside the NBBO, it appears that they are hoping to benefit from
Intermarket Sweep Order (``ISO'') satisfaction orders sent to the
Exchange pursuant to the requirements of Regulation NMS when a trade
through occurs on another trading center and the Wide orders are at
the CHX BBO. Since the sending of ISO satisfaction orders is not
required for non-Regular Trading Session activity, we are excluding
such activity from the proposed fee.
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The Exchange believes that the proposed order cancellation fee
benefits the national market system by promoting the display of Near
orders, which will result in increased displayed liquidity and reduced
order cancellations. This will, in turn, relieve the Exchange's systems
capacity and will result in decreased order and market data storage
costs. Since Wide orders are infrequently executed, such orders are
more expensive, on a relative basis, for the Exchange to receive and
process.
The Exchange proposes to implement the cancellation charge
effective November 2, 2012. The formula by which the cancellation fee
is derived shall be calculated and made available to Participants
daily, but billed after the end of the month.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act \21\ in general, and furthers the
objectives of Section 6(b)(4) of the Act \22\ in particular, in that it
provides for the equitable allocation of reasonable dues, fees and
other charges among members and other persons using any facility or
system which the Exchange operates or controls. The Exchange believes
that amendments to the order cancellation fee described herein should
help to recoup some of the costs of administering and processing large
numbers of cancelled orders while fairly allocating costs among
Participants according to system use. In addition, these changes to the
Fee Schedule would equitably allocate reasonable fees among
Participants in a non-discriminatory manner by properly imposing fees
on those Participants which excessively enter and subsequently cancel
orders while not imposing fees on Participants that do not engage in
this resource draining behavior. Furthermore, the proposed order
cancellation fee of $0.01/order cancellation is reasonable in light of
the fact that it is less than the current order
[[Page 69677]]
cancellation fee of $0.30/order cancellation.
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\21\ 15 U.S.C. 78f.
\22\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The proposed rule change is to take effect pursuant to Section
19(b)(3)(A)(ii) of the Act \23\ and subparagraph (f)(2) of Rule 19b-4
thereunder \24\ because it establishes or changes a due, fee or other
charge applicable to the Exchange's members and non-members, which
renders the proposed rule change effective upon filing.
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\23\ 15 U.S.C. 78s(b)(3)(A)(ii).
\24\ 17 CFR 240.19b-4(f)(2).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-CHX-2012-15 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CHX-2012-15. This file
number should be included on the subject line if email is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for Web site
viewing and printing in the Commission's Public Reference Room on
official business days between the hours of 10:00 a.m. and 3:00 p.m.
Copies of such filing also will be available for inspection and copying
at the principal offices of CHX. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-CHX-2012-15, and should be submitted on or before
December 11, 2012.
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\25\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-28135 Filed 11-19-12; 8:45 am]
BILLING CODE 8011-01-P